Business Model Debate: Big Tobacco Vs. Big Pharma

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BERKELEY, CA - MARCH 25: One-ounce bags of medicinal marijuana are displayed at the Berkeley Patients Group March 25, 2010 in Berkeley, California. California Secretary of State Debra Bowen certified a ballot initiative late Wednesday to legalize the possession and sale of marijuana in the State of California after proponents of the measure submitted over 690,000 signatures. The measure will appear on the November 2 general election ballot. (Photo by Justin Sullivan/Getty Images)

As support for medical marijuana grows and states consider proposals to legalize the drug for recreational use, advocates on both sides of the debate over whether to end the war on pot are pooling their collective resources to help push their agenda.

It’s no stretch to imagine, then, that the two industries best positioned to develop pot-based products—tobacco and pharmaceuticals—are also drafting playbooks to determine how they might capitalize on what CNBC.com estimates to be a $40-billion-a-year market.

And if there's a battle to bring recreational cannabis to market, most believe tobacco companies would have the upper hand.

“The tobacco companies are clearly in the best position to take their existing business model and employ cannabis and they have already privately thought to do so,” says Allen St. Pierre, executive director of Norml, an advocacy group for marijuana legislation reform. “These companies are well aware that they are sitting on a business model that needs only the acquiescence of the federal government.”

Indeed. A popular urban myth maintains that Marlboro Cigarettes, a product of Philip Morris, have the trademark pre-registered for a marijuana cigarette that would be sold in short packs called Marleys—a reference to the pot-smoking reggae legend Bob Marley—with the colors of the Jamaican flag (The company, however, says it has no such product in development, nor has it registered for a trademark on a marijuana cigarette).

The Tobacco Model

Indeed, companies like Philip Morris and British American Tobacco [BTI 67.80 -0.40 (-0.59%) ]already have the agricultural infrastructure in place, (fields of tobacco which could easily be converted to cannabis), a successful delivery method via cigarettes and well-established distributions channels.

In fact, tobacco retailers are already the default mechanism for the distribution of medical marijuana in some states.

A bill introduced this year in Rhode Island, for example, that would legalize the use and possession of marijuana by adults over age 21, stipulates that should the state fail to provide a licensed system for distribution within 18 months after the enactment of the bill, tobacco retailers would be allowed to sell the product.

A similar bill in New Hampshire that would legalize the sale of marijuana to adults for personal use also indicates that should the state fail to issue a retailer license to a qualified applicant within 90 days and the applicant holds a valid retail tobacco license they “shall be deemed to be a retailer.”

“Some states are saying they’d simply use the system already in place to sell marijuana,” says Darryl Jayson, a spokesman for the Princeton, NJ-based Tobacco Merchants Association, noting California is different in that it sells through licensed dispensaries, or pot shops. “If it became legal to sell marijuana and a manufacturer made these products, they would most likely enter the market through existing distributors and then through tobacco retailers.”

While tobacco companies have much to gain, analysts say pharmaceutical firms would lose billions in market share for prescription painkillers, specifically the marijuana-based products already on the shelves.

At present, two synthetic cannabinoids are approved for prescription use by the Food and Drug Administration—Marinol capsules, developed by Solvay Pharmaceuticals and available generically as dronabinol, and Cesamet oral capsules, developed by Valeant Pharmaceuticals International [VRX 42.07 0.20 (+0.48%) ], and generically sold as nabilone.

But many more exist in the R&D pipeline, including Sativex, a whole plant medical cannabis extract from GW Pharmaceuticals that is already approved as an oral spray in Canada.

Such companies would cease to invest in the development of any additional products containing THC, the primary active ingredient in marijuana, if weed became legal, says Joel W. Hay, professor of pharmaceutical economics and policy at the University of Southern California.

Already, he notes, the approval of medical marijuana in 14 states (and counting) has robbed them of incentive.

“It makes no sense to go through the expense of Phase I through Phase III testing and seek FDA approval of a product that goes out and competes with much cheaper over-the-counter medical marijuana,” says Hay. “There’s absolutely no reason why any pharmaceutical company should bother developing a cannabinoid product.”

The Pharma Alternative

Yet Big Pharma hasn’t tempered its pharmacological research of marijuana. In fact, it’s picking up steam.

The National Institute of Health reports the number of cannabinoid drugs under development in the U.S. climbed to 27 in 2004, from 2 in 1995—the most recent data available.

One reason, perhaps, is that the pharmaceutical industry is sitting on drug delivery models that have greater appeal than cigarettes—especially among younger generations for whom smoking is increasingly taboo.

Many would prefer using pills, skin patches, oral sprays and nebulizers, in which dosages are controlled, to taking a hit. That’s especially true for non-recreational users seeking the healing properties of THC for various health ailments.

Another reason, though, that Big Pharma continues to invest in marijuana is that it is hoping to discover combinations of the THC molecule that are better than the whole plant product available today on the black market, says Dr. Lester Grinspoon, professor of psychiatry emeritus at Harvard Medical School and author of the book, “Marijuana Reconsidered.”

“If pharmaceutical firms could develop a product that reduced the [so-called] munchie effect through biochemistry or one that could be injected to patients intravenously, which is not possible today because marijuana is not water soluble, they would make a fortune,” he says.

“They know that marijuana is so versatile in treating everything from Crohn’s disease to nausea to premenstrual syndrome that once it can be produced in an economy of scale and free of prohibition tariffs it would sweep all these artificially expensive pharmaceutical products on the market aside," adds Grinspoon.

Licensed pharmacies would no doubt distribute FDA-approved cannabis drugs under a doctor’s prescription, as they do today, but it’s also reasonable to assume that some firms might distribute their product via alternative medicine shops that specialize in natural and herbal medicine.

Several major pharmaceutical companies already did so in the early 20th century.

Before marijuana was made illlegal 70 years ago, for example, Eli Lilly [LLY 36.24 -0.29 (-0.79%) ] sold cannabis as an herbal extract (not a prescription medicine) for use as a painkiller.

Should lawmakers ever decide to legalize pot, tobacco and pharmaceutical companies would no doubt put research into overdrive to deliver a slew of THC-derived products to consumers, using the full strength of their financial muscle to dominate market share.